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The Idea of Averages vs. Margins

Matt Roberts
Educational Opportunities: 
Home > Education & Events > October 2017 > The Idea of Averages vs. Margins

Hi, my name is Matt Roberts, and I'm an Associate Professor in the Department of Agricultural Economics at Ohio State, I am a grain marketing state specialist there. I am also an independent consultant and speaker on agricultural economic topics.

One of the things I want to talk about, that I think is really important to understand, not just for 2016 or 2017, is the idea of averages. There's an old saying that says “averages are wrong for everybody”. In reality, farmers shouldn't make decisions based on averages. They should make decisions based on the margin; and as an economist, when we say "the margin," we mean the last unit; the marginal unit.

What that means in land, and I'm going to start with land, because land is one of the most important things right now. It's what has driven up cost of production the most over the past ten years. You don't think about your cost of production overall, across your entire enterprise. That's your average, but in reality, each of those parcels of land, each farm that you rent or the ground that you own, each of those is going to have a different cost of production, a different productivity.

You’ve got to think about these individually. You've got to know not only what the cost of production is for your entire enterprise, and what we know at extension is probably half of farmers don't know their actual cost of production for their enterprise. Instead, what you actually need is to know your cost of production. At the field level, or at least partials that you rent. You should know your cost of production at every field that you rent.

Why? Because then you can make those marginal decisions. For example, is this particular rental deal a good deal? What's my cost for that piece of ground? What's my productivity for that piece of ground? What are the yields? What's the fertility? What's the tile status for that piece of ground? You've got to think of the margin, not on the average.

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